UK inflation just keeps getting worse

The inflation monster is showing no signs of getting back in its cage. If you thought last month was bad, just take a look at the latest UK producer price (PPI) figures otherwise known as factory gate prices.

Capital Economics called them "absolutely horrendous", and it's no exaggeration. All the figures were far worse than expected, with the most dramatic being the 27.9% year-on-year leap in input price inflation, up from 23.3% last month, and compared with City hopes of 23.8%.

Output price inflation was also a shocker, soaring to 8.9% against analysts' guesses of 7.8% and well ahead of April's 7.5%, while even core', (excluding food and energy), output prices rose by 5.9%, compared with forecasts of 4.8% - apparently scrap metal was to blame. Again, all these numbers were the highest recorded since the stats were first compiled by the Office for National Statistics in 1986.

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Looks like real banana republic' stuff. Or worse. Though, of course, it won't prove quite so bad for consumers. The link between PPI and CPI (consumer price index) inflation isn't automatic, and most of the PPI rises are likely to be absorbed in retailers' profit margins. But while that's bad news for them, the hikes are now so big that at least a slice is bound to work its way into the high street, even if retail sales slump.

So it's developing into an ever-growing worry for those guardians of our national currency, the rate setters on the Bank of England's Monetary Policy Committee (MPC). Particularly the bit about the inflation problem spreading beyond the food and energy sectors.

As we've said before, the MPC's hands are tied by its 2% CPI target. We won't find out till next week how fast consumer prices have been accelerating, but assuming there's no government tinkering with that 2% target, there's almost nil chance of a near-term rate cut, even though the economy's clearly heading for recession. Mervyn King may even have to write a letter to the Treasury.

Indeed, the odds are growing of the next move in UK official rates being up. Apart from the strong hints dropped last week by the European Central Bank about a likely lift in euro rates next month, the money markets are sending out some strong signals over here.

Swap rates, at which financial institutions like banks borrow from each other, and which set the scene for the cost of money that lenders charge us when we want to borrow, are surging. This morning, one-year swaps were quoted at 6.39%. Although swap rates tend to trade about 0.5% higher than base rates, that's a virtually unprecedented one and a third percentage points above the official benchmark.

It's also a much bigger spread even than in the worst of the Northern Rock tension, and a clear sign that banks are getting serious jitters. At the end of last week, under-pressure buy-to-let lender Bradford & Bingley ramped up rates on its entire mortgage range by as much as 0.55%, while Abbey withdrew some of its fixed rates and hiked other products by around 0.25%. Egg closed its doors to new business.

Then this morning, MoneyExpert.com told us that credit card companies have upped the rates charged to customers whose 0% balance transfer deals have expired by 0.75%.

So for the moment, money markets are doing the Bank's job of controlling the amount of money in the system. But at some stage, the MPC will need to face up to its responsibilities. The next move in UK rates could be up, not down.